Rajaratnam Appeal Judges Voice Concern Over U.S. Wiretaps

Oct. 25 (Bloomberg) -- Judges hearing the appeal of Galleon
Group LLC co-founder Raj Rajaratnam, who is serving 11 years in
prison for insider trading, voiced concern over whether
prosecutors improperly won authority to wiretap his phone calls.

A three-judge panel in Manhattan heard arguments today over
whether to reverse Rajaratnam’s conviction for insider trading.
The central issue is if prosecutors misled the lower court judge
who authorized the wiretaps in 2008 by omitting key facts from
their request for the secret recordings, and if Rajaratnam’s
conviction should be overturned as a result.

“What happens if we agree with you?” U.S. Circuit Judge
Robert Sack asked Rajaratnam’s lawyer, Patricia Ann Millett, at
the start of the argument. “Does this mean a new trial?”
Millett responded yes.

A second judge, Jose Cabranes, suggested in his questions
that prosecutors had acted properly. The third judge, Susan
Carney, asked Millett what the “remedy” would be if the judges
agreed that prosecutors had misled the district court.

The appeals court didn’t rule. A reversal would lead to a
new trial for Rajaratnam where wiretaps wouldn’t be played,
while a decision for the government will keep Rajaratnam behind
bars. He is serving his time at the Federal Medical Center
Devens in Ayers, Massachusetts.

45 Recordings

Rajaratnam was convicted of directing the biggest hedge
fund insider-trading scheme in U.S. history. At the trial, the
government introduced 45 wiretap recordings, along with
documents and testimony derived from the wiretaps.

Yesterday, one of Rajaratnam’s sources of illicit
information, former Goldman Sachs Group Inc. director Rajat
Gupta, was sentenced to two years in prison for insider trading.
While the evidence against Gupta was circumstantial, prosecutors
at his trial played some recordings of his conversations with
Rajaratnam.

Gupta’s lawyers said they also planned to challenge the
legality of the wiretaps on appeal.

The wiretaps were central to the government investigation
of Rajaratnam and dozens of others. Beginning in 2008, the
Federal Bureau of Investigation recorded more than 2,200 calls
between Rajaratnam and 130 business associates, friends and
family over nine months.

Key Details

Before Rajaratnam’s trial, U.S. District Judge Richard
Holwell held a hearing on whether the wiretaps should be
excluded from the trial, as defense lawyers had wanted. He
refused, finding that while prosecutors acted “recklessly” in
omitting key details of an earlier Securities and Exchange
Commission probe of Rajaratnam, the omissions weren’t
sufficiently “material” to throw out the warrant.

During today’s argument, Millett argued that prosecutors
violated federal law by deceiving the judge who authorized the
wiretaps through their numerous “misstatements.” Prosecutors
omitted important details about the scope, duration and methods
of the SEC’s insider-trading investigation.

“In paragraph after paragraph” of the government’s
wiretap request, “there were statements that had no reality,”
she said. “You cannot ask for a wiretap without showing what
you’ve done.”

Assistant U.S. Attorney Andrew Fish defended the U.S.
wiretap request, saying prosecutors didn’t intend to mislead the
lower court judge. If prosecutors had included details of the
SEC investigation and the difficulties then confronting the
agency in gathering evidence against Rajaratnam, the lower court
judge would have been even more likely to authorize the
wiretaps, he said.

Future Abuses

“No suppression is warranted,” Fish argued.

Cabranes appeared to agree with Fish, saying the omitted
facts may have strengthened government’s wiretap request. Sack,
on the other hand, asked whether important facts were “hidden”
in the government’s wiretap request and if that constitutes
recklessness on the part of the government.

Carney wanted to know how the appeals court would prevent
future abuses by prosecutors if the panel didn’t reverse
Rajaratnam’s conviction.

“What tools would be available to prevent this from
happening tomorrow?” she asked the prosecutor. Fish replied
that there wouldn’t be another such case because prosecutors are
more cautious now.

The case has attracted wide attention in the legal
community because it’s the first time the government turned to
wiretaps to investigate insider trading. Robert Blakey, a
professor at Notre Dame Law School in Indiana who is viewed as
the architect of the wiretap statute, submitted a legal brief on
behalf of Rajaratnam.

‘Glaring Omissions’

Kevin O’Brien, a partner a Harris, O’Brien, St. Laurent &
Houghteling in New York and a former federal prosecutor, said
prosecutors must follow strict disclosure rules before obtaining
approval for a wiretap because wiretaps are so invasive.

“If you start making exceptions for glaring omissions, you
loosen the compliance rules that govern wiretaps and pretty soon
prosecutors will not take their disclosure responsibilities as
seriously as they should,” he said in a telephone interview
before the argument.

In the end, though, he agreed that the prosecutor’s
omissions in their Rajaratnam wiretap request were “harmless,”
and wouldn’t lead to a reversal.

The Rajaratnam appeal is U.S. v. Rajaratnam, 11-04416, U.S.
Court of Appeals for the Second Circuit (New York); the Gupta
case is U.S. v. Gupta, 11-00907, U.S. District Court, Southern
District of New York (Manhattan).